Can you get a hard money loan when you have bad credit? We answer that question in this post.

Getting a hard money loan can mean the difference between getting in on a highly profitable fix-and-flip property deal or having to wait. Since time is money, this means likely losing profit.

If you’re looking for a reliable hard money lender check out our Hard Money Lenders Directory here >

Hard Money Lenders Look Past Your Credit Score

The fundamental difference between a hard money loan and a traditional mortgage is that hard money lenders do not consider credit score to be the major factor in their loan decision. Instead, they anticipate getting paid by using two tactics: First, aggressively pursuing timely payment. Second, quickly repossessing the property and selling it to recoup their cash in case you default.

Hard Money lenders know that borrowers are primarily interested in financing risky real estate renovations. They know the borrower may have already been denied by one or more traditional real estate lenders.

Hard money borrowers include bad credit borrowers, new real estate investors, and inexperienced rehabbers.  These lenders understand that their financing may be the only option for these borrowers. However, the profit potential is significant.

Past credit issues or bankruptcy will not stop you from getting a hard money loan. The key is whether you can prove the deal is economically sound in the first place.

Each hard money lender has their own process for determining the acceptable risk level of borrowers. Some will research the borrower’s credit history. Others will focus on deal upside, loan terms and payment scenarios. All hard money lenders will try to quickly and aggressively sell the property if the borrower defaults.

Bottom line, most hard mone lenders will have creative ways of working with bad credit borrowers if the deal economics look profitable.

Hard Money Loans Have Stringent Terms

Hard money loans come with stringent and aggressive terms designed to generate profits for the lender, even if there is a high default rate. Interest rates can range from 10-15%. Lenders may require 20-30% cash down payment.

Hard money lenders are also very strict about payment timing. Missing a payment by a single day can cause immediate penalties, fees and interest rate increases. This is not only to protect the lender, it’s also to force the borrower to be disciplined and make payment on time.

Since borrowers may be using the hard money lender as a last resort, the lender will consider this when determining the terms, fees, and time frames. Hard money lenders are just like any other lending institution that needs to protect itself from potential losses by minimizing borrower risk.  

Hard Money Lender Strategies for Bad Credit

Since minimizing borrower risk is important to them, hard money lenders will have clear strategies to ensure they remain profitable.

This could mean refusing to lend in states with extensive regulations that can slow down the process.

Most lenders do extensive market analysis to spot declining real estate values, and will quickly stop lending in falling real estate markets.

The lender will typically require a higher cash down payment or other liquid collateral from borrowers with bad credit.

A personal guarantee may be required to “backstop” the lender’s recovery.

When a property rehab project is involved, the lender will often “signpost” the payments so cash is released only upon completion of defined goals on the project. That way, if the project falls behind, thereby increasing the investment risk substantially, the lender can withhold funds and avoid further risk.

What Can Harm a Credit Score?

There are many things that can harm a credit score, including:

  • Bankruptcy
  • Foreclosure
  • Missed loan payments
  • Refinancing a loan
  • Not having a credit card
  • Being attached to another person’s bad account
  • Debt consolidation

These are all things that indicate higher risk to the lender, even if the loan is fully secured by the property.

How To Mitigate Your Bad Credit?

Even if you have poor credit history or recent failed property deals, it’s still possible to mitigate the negative effects.

One of the primary concerns hard money lenders have is renovation project failures. Even experienced property fix & flippers have renovation projects that fall off the rails. Contractors don’t show up, unexpected permitting and structural issues pop up. These are not simple projects!

You can mitigate this risk by hiring an experienced construction project manager and budgeting expert. This person’s job is to present the most realistic scenario to the lender, and to keep your renovation project going smoothly and on schedule.

Another strategy is to engage with and present your project plan to multiple hard money lenders before you apply for a loan. As you come upon new potential deals, run the numbers and present your potential plan to the lender for feedback. This shows a pattern of competence.

Some hard money lenders may also be able to help you find a buyer for your property through their real estate industry connections. If you can collaborate with several hard money lenders to build a solid buyer network, this substantially reduces the lender’s risk. This will help you get better rates and less-onerous terms.

Finally, it may make more sense to borrow through a company you own, rather than your personal credit. Personal and company credit ratings are separate. A newly-formed LLC, for example, will have no credit history. This may actually be better than the owner’s personal credit rating!

Remember, hard money lenders are more interested in the riskiness of the property, the deal economics, and the timeline than credit history. If you can present a good deal then any credit issues will be mitigated.

What is Considered “Bad” Credit for a Hard Money Loan?

A credit score under 620 is considered a risk to many lenders. If your score is below this level your hard money lender may increase the interest rate, fees and charges.

How is Credit Scored?

Credit scores are determined differently by each country. In the United States, a credit score is a number that refers to the creditworthiness of an individual. Basically, this means the person’s ability to pay their bills and meet their financial obligations on time. This number is set based on credit files and report information.

There are three major credit agencies that handle U.S. consumers: TransUnion, Equifax, and Experian.

There are also multiple credit agencies that cover companies, including Dun & Bradstreet, Standard & Poor’s, Moody’s and Fitch.

The FICO Score (Individuals)

FICO is the most popular type of credit score. It was created by the Fair Isaac Corporation (FICO.)

FICO scores range from 250-900. The higher the score, the better the borrower’s creditworthiness.

Although there are slight variations, credit scores for individuals are usually broken down as follows:

  • Excellent/very good credit score: 700 to 850
  • Good credit score: 680 to 699
  • Average/OK credit score: 620 to 679
  • Low credit score: 580 to 619
  • Poor credit score: 500 to 579
  • Bad credit score: 300 to 499

In the United States, three FICO consumer scoring models are used most often:

  • Beacon 5.0 score (from Equifax)
  • FICO Model II score (from Experian)
  • Classic04 score (from Transunion)

There are different FICO scores for different lending markets. For example, there are FICO scores for real estate lending and nautical lending (boats, etc.). There are also general FICO scores that are not specific to one industry.

Corporate Credit Ratings

Since hard money loans are typically for less than 12 months, these fall into short-term corporate credit ratings. These are broken down for the top 3 credit rating agencies below:

Fitch (highest credit quality to lowest)

  • F1+
  • F1
  • F2
  • F3
  • B
  • C
  • D

Moody’s (highest credit quality to lowest)

  • P-1
  • P-2
  • P-3
  • Not Prime

Standard & Poor’s (highest credit quality to lowest)

  • A-1+
  • A-1
  • A-2
  • A-3
  • B
  • C
  • D

To Recap…

Borrowers with bad credit can still get a hard money loan and complete that fix-and-flip project successfully. The availability and costs of the loan depend on many factors including creditworthiness, the property itself, and the level of involvement the lender will have on the project. There are many real estate investors and rehabbers that have succeeded in the process who have had less than stellar credit ratings, so do not let that stop you.

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